In a longitudinal research study funded by Kauffman Foundation found that over 46% of all innovative new businesses that lasted over five years were founded by “user entrepreneurs”. This figure is even more impressive when you consider that these startups represent only 10.7% of all US startups. The study tracked over 5000 startups founded in 2004 and it was released yesterday.
This fully validates the trend towards end-user lead product innovation described by Eric von Hippel in his book Democratizing Innovation. The two single most important aspects of this group of innovators is their deep knowledge in the subject area and their motivation to improve the existing conditions. This is mainly because the mainstream product manufacturers have no incentives to supplant their current production line with new risky products and because no one listens to end-users who have daring ideas.
The Kauffman funded study found that the professional-user entrepreneurs are very knowledgeable and on average they have a much better human capital involved in the startup than the other types of entrepreneurs. It makes sense in my mind, because I imagine, those people are driven by passion for creating something that they would love to use, attracting a similar breed of people from their industrial field. They are the experts and they know the people in the field better than any outsiders. It is not that the other groups don’t have passion, but while they want to make good products one of their pressing goals is to sell their products to the users, the other people.
The democratisation of innovation favours the end-users, people who want to create better products for personal use. In this group especially females and some minority groups are attracted by the idea to follow their dream and have a go. A high proportion of these entrepreneurs manage to attract good venture capital financing.
This is very good news, because this may be a sign of the future of employment. Individuals from all walks of life drawing from their personal experience to detect an unmet demand, and in the course of inventing a new source of supply they create high value add jobs for themselves and for many others.
I wrote a few weeks ago about the not so good Japan’s outlook and about the well documented view of how the government debt will soon accrue to the point where drastic, painful and unpopular measures will need to be taken. The tragic events caused by the massive earthquake and the devastating tsunami will accelerate the arrival of that moment.
Initially, immediately after the earthquake, the financial press was mostly focused on the precarious situation of the nuclear plants in Japan, and the potential impact on the exchange rates. There are many who warn that this could be getting very serious and have consequences for the bond market in US. Other voices, on the other hand argue for a limited impact.
However, right now the media is much quieter and Japan related news are almost forgotten and pushed into the background. It is almost as if everything will go back to normal following a painful but optimistic process of recovery. Now the main talk is about the V shape recovery of Japan.
Is this all that simple? If this was an one-off occurrence in the global markets it wouldn’t be a huge shock, but the problem is this is not the only hot issue. Following the US housing meltdown, the European sovereign debt crisis has engulfed the whole EU. Almost all developed countries are touched by one crisis or another in the same time. On top of this, the Middle East continues to complicate an already unstable situation making anyone nervous at the mere mention of the word “oil”.
Many analysts predict that the funding requirement, which some estimate to be around $200bln, will force some of the Japanese bondholders to sell US bonds. Karen Maley from Business Spectator describes this scenario very well in an article published in the Australian online financial magazine The Business Spectator (“Will Japan’ Finance Fracture?”, 14 March 2011). Over the years Japan has accumulated large amounts of US bonds in excess of $850bln, the second largest US bond holder in the world. Guess who is the largest one? Yes, naturally, China with its over $1trillion US bonds amassed in a relatively short period of time.
Is it too far fetched to see a situation where both Japan and China will start selling heavily US bonds because Japan needs to pay for its reconstruction and reduce its debt and because China is worried the value of its reserves will diminishing rapidly. This will have a negative impact on the capacity of US government to raise capital and consequently its ability to fund its own public programs.
On 28 September 2005, in an address to Economic Society of Australia Dinner in Melbourne, Ian Macfarlane the then governor of Reserve Bank of Australia (RBA) expressed his optimistic view on the global imbalances which he considered to be of a benign nature protected by an ongoing global prosperity. The imbalances he was referring to were around the flow of money to China and accumulation of debt in US (and Western world in general). The world had since then experienced turmoil at one end of that imbalance, the USA and Europe. Now all signs are that we will see turmoil at the other end of the imbalance, China. In trying to protect its exports by pegging its currency on the US dollar, after QE1 and QE2, China is struggling to cope with an increasing inflation which threatens to destroy its accumulated wealth. Despite imposing on banks more stringent capital requirements, the consumer prices are still simmering causing an upward pressure.
Europe has a similar problem with US but with a different treatment. The German formula requires constraint. The austerity will reduce demand, impacting on Chinese exports. Will Europe manage to go through all this unscathed?
How quick have we forgotten how close we were to a major collapse two years ago. Now we are all back to the optimistic talk about recovery: the recovery of US housing market, the fixing of the European financial troubles and the defusing of the Japanese debt time bomb. But if you take a closer look and you put all the serious issues together, the prospect of a huge, super black swan flying above our heads is a credible scenario, the worst case scenario. The changes required by this scenario will be very painful and it will cause a dramatic shift of power and a change in the world financial system. We may witness a Bretton-Woods kind of reform sooner than we think. And maybe that is not such a bad thing in the long run.